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Thursday, January 22, 2015

A Best of Times, Worst of Times Economy

by Brian T. Lynch, MSW

How is it possible that the investment economy is booming while the economy of ordinary citizens is still in such a slump? Stock prices are at an all time high and big time investors are getting high rates of returns while worker wages have declined and are just starting to rise. The raises in wages so far is still not keeping up with inflation. It seems like there are two separate economies not entirely connected to each other. Right?

To understand what's happening we have to begin by acknowledging that most of the richest billionaires today have gotten much of their wealth increases at the expense of lower wages for the rest of us. This trend is more than thirty years old now in the United States. There is plenty of evidence supporting this fact for those who care to look. And this wage suppression is a global phenomenon, not just a U.S. feature.

In order to increase consumer spending while wages remained flat we have had to make a series of changes, beginning with mothers entering the workforce, longer work hours followed by layaway plans, credit cards and then home equity loans to pay for spending beyond our means. These have run their course and the long hard pay down of personal debt (including college loans) means that consumer spending will be sluggish for the foreseeable future.

The impact on the economy of stagnant wages is ever slower consumption of goods and services over time. There isn't as much money to buy things. This slower rate of consumption suppresses demand. Lower demand means fewer jobs and even lower wages for the rest of us. This is the cycle were we find ourselves today.

The consumption of goods produces the profits from which owners of capital collect returns on their investments. Lower demand due to suppressed wages would normally also lower returns on capital investments but for the factors that have kept consumption afloat. Now there are no hours left in a day, fewer household members available to work and no more capacity to borrow against future earnings. The impact of low wages has come home to roost and it means fewer sales and less profit to be made.

Before the 1970's this situation would right itself as owners shared a portion of their wealth by offering productivity raises to reward their workers. Productivity wages are based on growing productivity, hourly GDP, It is separate and apart from cost of living increases. Productivity raises, along with cost of living adjustments, allowed the labor/consumers to increase their spending thus boosting demand. Increased demand would spur on manufacturing and stimulate the whole economy.

But today's billionaires have found another way to profit without sharing their wealth with wage earning consumers. They spotted the growing ownership stake that many in the middle class have accumulated and they created opportunities to take it from them.

It is hard for most of us to see in our lifetime, but this is the first time in modern history that the middle class (upper-middle mostly) has accumulated a significant share in capital ownership. Prior to the vast destruction of property caused by the world wars in the last century, wealth was extremely concentrated at the top, and it's happening again today. Middle class gains in the 20th Century directly correspond to capital losses by the wealthiest owners during the two world wars. Now many of us have retirement accounts, money market funds, stock holdings, etc. People in the upper-middle class, such as doctors, lawyers and middle-managers, have become mini-investment capitalists.

Billionaire capitalists, the "true heirs" to wealth ownership, have responded to middle-class ownership of capital by creating a massive financial investment casino filled with elaborate new investment vehicles. The object is to entice new wealth owners to play in the billionaire's casinos. Mortgage backed securities and swaps are just two small examples that nearly bankrupted the economy in 2008.

These new and incomprehensible investment products has spawned a whole new class of hucksters, like Bernie Madoff, who use these bewildering new instruments to create slick ponzi schemes. But the bulk of these new investment opportunities are just big casino games in which the house (billionaire owners) always wins. Billionaires are quickly siphoning away middle class ownership stakes through high finance games of chance. In this way they boost their own return on investments and entertain themselves without having to share their wealth by offering higher wages.

Because these billionaire owners, who make up less than .01% of the population, control the investment odds, they are sure to win back all the capital their families lost in the war years of the last century.

This explains why the stock market and investment economy seem to be booming while the worker economy on Main Street slumps. Billionaire capitalists don't have to share wealth to make wealth like they use to. There are enough small investors with an ownership stake who are willing to gamble what little they have in this new investment casino. It is enough to keep billionaire fortunes growing faster than the economy as a whole.

If you, the reader, are still with me at this point let me assure you that the geometrically rising gains by the wealthiest owners of capital are not an inevitability. There are difficult but concrete steps we can take to bring capitalism back into balance for everyone. A discussion of these solutions, however, does require a much deeper understanding of problems that I can provide here. I firmly believe it is in everyone's best interest to acquire a better understanding of the forces creating our two economies; Forces that are threatening our democratic institutions. For a fuller understanding I recommend Thomas Piketty's excellent book, Capitalism in the 21st Century. I encourage you to strike up conversations with others and share your thoughts and questions.